German Stocks at a New Historic High (EWG, EWGS, DBGR)

By: Benzinga

Posted: 10/15/2013 11:04:00 AM

Referenced Stocks: BASFY;BAYRY;DBGR;EWG;SI

Investor confidence increased in Germany and the country's
stock market rallied to a new all-time high last night.

The German ZEW survey of investor confidence came in at 52.8
in October, well above the estimates and the reading from
September. This number along with the possibility of a deal in
D.C. was enough to send the DAX Index to the highest intraday
level ever.

For the year the DAX, Germany's leading stock index, is
lagging the U.S. markets with a gain of 15 percent. But the
breakout last night was significant in that it shows the strong
bull market remains intact. Investors in the U.S. can play the
German market with a handful of individual stocks or turn to one
of the ETFs that focus on the country.

The ETF is a basket of 54 stocks focused mainly on the
large-cap asset class within the country. The sector allocation
is diverse with consumer discretionary, financials, materials,
and industrials all making up at least 14 percent. The largest
holdings are three German multinationals, Siemens AG (NYSE:
SI
), Bayer AG (OTC:
BAYRY
), and BASF SE (OTC:
BASFY
).

While the DAX is hitting record highs, EWG remains below its
2011 high and would need to rally another 29 percent to regain
the all-time high set in 2007. The underperformance of EWG versus
the index is the composition of the ETF. While the DAX is more
diverse, EWG is more reliant on a small number of stocks. This is
often the case with country ETFs.

This year it would have been a better investment to
concentrate on the small cap stocks in Germany over the big
names. In 2013 EWGS is up 23 percent versus a gain of 14 percent
for EWG. The ETF is made up of 103 small cap stocks based in
Germany with a heavy concentration on the industrials. The top
holdings are companies that most U.S. investors would not
recognize, and that is not always a bad thing. The ETF recently
closed at its best level since it began trading in January
2012.

The ETF tracks the same index as EWG, except it is hedged for
any fluctuations between the U.S. dollar and the Euro.
Essentially the ETF is long German stocks and short the Euro
versus the U.S. dollar. Recently the Euro has been moving higher
in value versus the greenback due to the mess that is taking
place in D.C. If the view is German stocks will continue their
uptrend, but the Euro is due to fall then the best option would
be DBGR.

There is always country-specific risk when buying a
single-country ETF and the German ETF is no different. That being
said, of all the European nations, Germany is one of less
volatile and safer bets.